ARTICLE (March 08 2010): Islamic Economics can provide the remedy of all the issues being the rootcause of inflation. As stated earlier, excess capacity means that insufficient demand exists to warrant expansion of output, while bondholders view strong capacity utilisation as a leading indicator of higher inflation, which decreases bond prices.
Further, tight monetary fiscal and monetary policies shrink the size of economy by reducing the level of economic. Apart from above, the crowding out effect can only be extinguished through the effective implementation of Islamic economics. Islamic economics, in contrast, advocates for generation of economic activities through generation of economic activities instead of limiting the same.
This concept can easily be deduced from the concepts of Islamic financial instruments and conceptual framework of Zakat and Sadqa. This concept is supported by the expansion of multinational companies (MNCs) as many industries in the developed capitalist economies suffer from chronic excess capacity.
Critics of market capitalism, therefore, argue the system is not as efficient as it may seem, since at least 1/5 more output could be produced and sold, if buying power was better distributed. In other words, critics of capitalism are in favour of very principles enunciated in Islamic economics. However, the generation of economic activity should be aligned with development expenditure (instead of non-development expenditure) and Islamic financial instruments.
The alternate of auction of treasury bills and bond market is Islamic financial instruments. Development expenditures are normally identified on the basis of its potential benefits, which are then transformed in the shape of feasibility report. In the light of principles of Shariah, such development expenditures ought to be carried either on the basis of "Build, Operate and Transfer" or "Islamic financial instruments".
The most important aspect of BOT basis is an independent check over collection on the project of development project and audit by external professionals for the very purpose of transparency. The payment to the contractor on the basis of Islamic finance ought to be correlated with the rate of return on such development expenditure. Each project of development expenditure ought to be audited by external professionals. External professionals may include members of ICAP, ACCA and ICMAP.
This approach will have many folds like transparency in development expenditure, generation of economic activities, limiting non-development expenditure to the extent of tax revenue, reducing the pressure of financing the development expenditure and elimination of fiscal deficit or reliance over treasury bills and increase in employment.
Bizarre taxation and corruption:
The purposeless taxation has never been made popular among the masses of Pakistan as they can see how the revenue is utilised by having the uncountable army of ministers to strengthen the governments, announcement of frenzy schemes to fill the pockets of issuing etc.
Further, the income tax collected at import stage is inclusive of customs duty, sales and federal excise tax and in case of commercial importers pay value-added tax in advance without any corroboration with the actual profit earned. Minimum tax presumes that businesses are hiding profits and they must pay some tax to the government.
Manufacturers see excise tax as a tax only which put the local manufacturing activity at competitive disadvantage. The comparative rates of final Tax Regime on supplies contracts, commission, rent, dividend, interest prizes, petroleum products etc as compared to the rates, prescribed under normal tax regime, raises doubts about the policy of favouring the haves and have-nots.
If the development expenditure is financed by Islamic financial instruments, then the revenue generated from judicious taxation can effectively be used for the very purpose it was collected for, that is, spending money on infrastructure, military, police, education, healthcare, welfare benefits etc. This policy would effectively erode the reliance over bizarre taxation, Seignorage, fiscal deficit, sale of assets and issuing bonds.
Moreover, in Pakistan there were and are many perceptions regarding the applicability of tax being un-Islamic as people believe that Zakat, Khiraj, Fai and Jazia are the only prescribed taxes. However, taxes are not limited to that but one may wonder import tax - octroi (chungi) was first imposed during the period of first four Caliphs as this is a need of the society. The principles of taxation in Islam are based on purpose and are evident from following piece of history:
"At times, Syria (Sham) was attacked by Tatars, the King decided to take judicial decree from the Islamic scholars for imposing a tax to meet the expenses. When the issue came before Imam Noovi [Rahmatullah Alah], he opined:
"The King lives a lavish life and has a lot of wealth, he also spends a lot of money but his wealth, income and perquisites are not taxable, let him start first by donating his wealth and then the treasury has the right to tax over the common people."
A revenue collector has received some gifts and this instance was brought into the knowledge of Last Prophet [PBUH] who immediately ordered him to deposit the same into the Bait-ul-Maal. When he asked for the reason, the Last Prophet [PBUH] replied that you received these gifts owing to your position, if you were not on this position then you would not have received it! This is the desired mentality of the tax collectors.
Corporatization, price setting, subsidies and corruption:
In order to finance the balance of account deficit, the Privatisation Commission has sold almost all the basic utilities like telephone, gas and electricity. This policy has not only made the government handicapped, but it is now also responsible for what it does not own even. Moreover, the conflict of interest has also emerged whether the government should reduce the prices or get more dividends to finance the budgetary deficit.
With respect to electricity, the issue was not settled even at the first place when the prices were negotiated with power companies. One wonders about the need for negotiating the prices, of electricity with the IPPs instead of having fair market play policy and allowing everyone to join.
Narrated Ibn-e-Abbas [RA], Allah's Messenger [PBUH] said, "Do not go to meet the caravans on the way (for buying their goods without letting them know the market price), a town dweller should not sell the goods on behalf of the latter." Ibn Abbas was asked, "what does he mean by no selling the goods of a desert dweller by a town dweller?" He said, "He should not become his broker." [3:367-O.B - Bukhari - The book of sales (bargain)]
The policy needs to be changed and open competition should be allowed, among the new entrants and let the market forces determine the prices. Such healthy competition would eliminate the concept of subsidy. The policy of open competition should be adopted in all those areas where prices are regulated and consumers are subsidised.
Narrated Ibn Umer [RA], Allah's Messenger [PBUH] said, "you should not try to cancel the purchases of one another (to get a benefit thereof), and do not go ahead to meet caravans (for buying the goods) [but wait] till it reaches the market" [3:374 - O.B - Bukhari - The book of sales (bargain)]
One wonders, how the government could absolve itself from the provision of basic utilities!
Price stability and cost audit:
Price stability is a chronic issue, which was always tackled at the grassroots level by having a decision of the Supreme Court and constituting committees for spot checks. However, regulators never looked at the pros and cons of the issue, hence it was never dealt at strategic level. Islamic economics suggests the concept of fair profit.
The fairness in the concept of fair profit is left at the discretion of the businesses, who are expected to act fairly in this regard. However, industry's profit and general profit level could be used as benchmark in this regard. It is in accordance with the principles of Shariah that the traditions and convention of each community are to be referred to for deducing a judgement in such matters as sales, renting, measuring and weighing where there is no fixed judgement.
Consequently, one wonders about the dormant concept of cost audit embodied in Companies Ordinance, 1984 for more than 25 years. The concept of cost audit may be implemented being a deterrent to more than fair price. At the moment, there are fair number of professionals of accounting bodies [ICAP, ACCA and ICMAP] are available to effectively help the government in implementing the same.
Price stability and future trading:
Looking at West, creative accounting, off balance sheet transactions, complex financial derivatives and future trading are the rootcauses of price instability, which result in erosion of prices, that is inflation. These issues are creeping into Pakistan, but instead of taking the lesson, the cabinet is about to pass the Future Trading Bill, 2010, which is against the Constitution of Pakistan being against the principles of the Holy Quran and Sunnah.
It is pertinent to note that al-Gharar (the sale of what is not present) and Habal il-Habala (the sale of what is in the womb of an animal) is prohibited. Narrated Abdullah bin Umer [RA], Allah's Messenger [PBUH] forbade the sale called Habal il-Habala, which is a kind of sale practised in the pre-Islamic period of ignorance. One would pay the price of she-camel, which was not born yet and would be born by the immediate offspring of an extant she-camel [3:353 - O.B - Bukhari - The hook of sales (bargain)]
It is worthwhile to note that if somebody sells fruits before their benefit is evident and free from blights and then they get afflicted with some defects (they will be given back to seller).
Narrated Anas bin Malik [RA], Allah's Messenger [PBUH] forbade the sale of fruits till they are almost ripe. He was asked what is meant by 'are almost ripe'. He replied, "till they become red", Allah's Messenger (PBUH) further said, "If Allah spoiled the fruits, what right would one have to take the money of one's brother (ie other people)?" [3:403 - O.B - Bukhari - The book of sales (bargain)]
It is strongly suggested that future markets are strictly prohibited in Islam and will deteriorate the result of any efforts for price stability. The core reason is that it is normally done in raw materials through speculation meant to mint money from money.
Accounting and accountability:
PIFRA is a sigh of relief during current outdated single entry accounting system followed by the government of Pakistan. However, delays in audit by AGPR do not have a substantial impact over the attitude of corrupt people because they had already left their positions.
It is suggested that adoption of double entry accounting, transparency, timely audit of governmental accounts and contract would serve as a deterrent to corruption. In this regard, the adoption international accounting standards issued for public sector would provide an effective mechanism for internal control, accounting and audit thereof.
Foreign currency reserve, barter and balance of payment:
Austrian economists advocate the return to genuine free market, leading to abolition of the state-sponsored central bank that protects, supports and controls modern fractional reserve, banking and advocate free banking or a return to a 100 percent gold standard. In fact, the recent statement of the IMF is more surprising.
Dominique Struass-Kahn, the head of IMF suggested that the organisation one-day might be called upon to provide countries with a global reserve currency that would serve as an alternative to the US dollar. "That day has not yet come, but I think it is intellectually healthy to explore these kinds of ideas now." He said having other alternatives to dollar would limit the extent to which the international monetary system as a whole depends on the policies and conditions of single, albeit dominant, country.
Moreover, he said that we must build on this positive momentum: to reform the fund into an institution even better equipped to meet the challenges of the post crises era. Consequently, it is high time for strategic thinker to look at the pros and cons of the statement of the IMF chief in terms of Pakistan's foreign currency reserves.
The free trade agreements with other countries and Afghan Transit Trade Agreement are the core reason for imbalance in balance of payment and surging current account deficit Pakistan has recently entered into a barter trade with Indonesia and this area need to be explored further.
The free trade agreements need to be revisited within the framework of requirement of Pakistan and other countries. Further, the phenomenon of requirement of import does not mean usage in the country but should be restricted to those things without which we cannot survive.
Conclusion:
When you press the Fl button on your computer for help, it gives the solution of your problem you are riddled with into the system. However, you will not get the answer from Fl if someone hammers the computer. The solution is known to the creator of computer not the computer itself.
Similarly, the solution of our inflation problem is available in Islamic economics and Ahadees of Bukhari quoted above provides a clear-cut solution while the monetary and fiscal economists even do not agree on any remedial measure for inflation. The SECP, FBR and SBP all have to play for curbing inflation apart from other administrative measures discussed above.
Curbing inflation is much more than adjusting interest and exchange rates apart from limiting government expenditure and increasing tax-to-GDP ratio.
taxonomy.ashraf@gmail.com
Source: http://www.brecorder.com/index.php?id=1028236&currPageNo=1&query=&search=&term=&supDate=
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